(The following statement was released by the rating agency)
FRANKFURT/BARCELONA/LONDON, May 16 (Fitch) Fitch Ratings has
affirmed the
Metropolitan Municipality of Istanbul's (Istanbul) Long-term
foreign and local
currency Issuer Default Ratings (IDRs) at 'BBB-', and its
Short-term foreign
currency IDR at 'F3'. The National Rating has been affirmed at
'AA+(tur)'. The
Outlook is Stable.
KEY RATING DRIVERS
The ratings reflect Istanbul's continued strong operating
performance, wealthy
economy and solid fiscal management. They also take into account
an expected
increase in debt, contrary to Fitch's previous forecast of a
decline, reflecting
large capex investments in 2014-2016, which the agency expects
will be funded
through higher-risk foreign currency loans, rather than by local
currency loans.
Nevertheless Fitch expects operating performance to remain
strong, albeit with a
slight deterioration in debt coverage which should remain below
two years. The
Stable Outlook reflects Fitch's expectations that the city's
operating
performance and debt metrics should remain consistent with the
current ratings.
Fitch expects Istanbul to continue posting strong operating
surpluses, supported
by its large and well-diversified tax base and largely
investment-focused
responsibilities. The local economy was resilient against the
adverse effects
resulting from the investor sentiment change in the
international capital
markets and heightened political uncertainty in 2013, which led
to a
depreciation of the Turkish lira by about 26% against the euro
and 20% against
the US dollar. The city's tax revenue in 2013 grew 16.3% (yoy),
resulting in an
operating margin of 60%.
Istanbul is Turkey's main economic hub, contributing about one
fourth of
national GDP and more than 40% of national tax receipts. Rapid
urbanisation and
continued immigration flows challenge the province with a
continued need for
infrastructure investments. In 2013 the population grew 2.2% yoy
to 14.2
million. Istanbul plans to construct additional metro-bus lines
of 200km in
2014-2019, which would cost around TRY25bn.
Direct debt stood at TRY5.2bn at end-2013, up 14% (yoy) mainly
due to the sharp
depreciation of the Turkish lira, and is equal to 69% of its
current revenue
(see 'Turkish Subnationals: FX Volatility Manageable at Current
Levels' on
www.fitchratings.com). Istanbul faces significant foreign
exchange risk in times
of elevated financial volatility because a large part of its
debt is denominated
in foreign currency. At end-2013 foreign currency debt as a
share of total debt
stock increased to 93%, from 89% in 2012. Istanbul decided to
increase its FX
borrowing given a significant increase in domestic interest
rates and the short
term maturity profile of domestic loans. Additionally,
Istanbul's dependence on
imported rolling stocks for its investments in transportation
infrastructure
further exposes the city to foreign currency-denominated
earmarked funding.
The large foreign exchange risk is, however, mitigated by the
city's lengthy
maturity profile averaging 8.4 years. The risk of an
uncontrolled rise in
foreign currency borrowing is also checked by regulatory
oversight as all
foreign currency borrowings must be approved by both the
National Interior
Ministry and the central government's treasury.
Should debt servicing costs increase materially as a result of
currency
depreciation, Fitch would expect Istanbul to respond by reducing
its capital
expenditure so that the debt to current balance ratio remains at
1.2-1.3 years
in 2014-2016.
The debt of IETT, Istanbul's metro operator and also part
financier of the
construction of the metro, declined 47% to TRY617m and matures
towards the end
of 2019. Fitch considers this as indirect debt. Istanbul's
contingent
liabilities are limited and its subsidiary companies are largely
self-funding.
RATING SENSITIVITIES
A sovereign downgrade of Turkey (BBB-/F3) would prompt a
downgrade of Istanbul's
ratings. Persistent financial instability resulting in a further
depreciation of
the Turkish lira in excess of 30% , material interest rate
volatility or a
deterioration of the deficit before financing to more than 10%
of total revenues
could also prompt a downgrade, although this is not Fitch's base
case scenario.
An upgrade of the sovereign ratings may result in a similar
action on Istanbul's
ratings. Further, a reduction of foreign currency exposure to
below 35% of its
outstanding debt, continued financial strength and consistent
management
policies would be positive for the Long-term IDRs and National
Ratings.
KEY ASSUMPTIONS
Our base case scenario relies on the following assumptions:
-Operating margin to remain above 50%
-Current balance sufficient to cover at least 60% of capital
expenditure
-Direct debt to current balance increases to 1.3 years in 2016
Contact:
Primary Analyst
Nilay Akyildiz
Director
+49 76 80 76 134
Fitch Deutschland GmbH
Taunusanlage 17
60325 Frankfurt am Main
Secondary Analyst
Fernando Mayorga
Managing Director
+34 93 323 8407
Committee Chairperson
Guilhem Costes
Senior Director
+34 93 323 8410
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530
1103, Email:
peter.fitzpatrick@fitchratings.com.
Additional information is available on www.fitchratings.com
Applicable criteria, "Tax-Supported Rating Criteria", dated 14
August 2012,
"International Local and Regional Governments Rating Criteria
outside United
States", dated 23 April 2014 on www.fitchratings.com.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
here
International Local and Regional Governments Rating Criteria -
Outside the
United States
here
Additional Disclosure
Solicitation Status
here
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS
LINK:
here. IN ADDITION,
RATING
DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE
ON THE AGENCY'S
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS,
CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S
CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE
FIREWALL, COMPLIANCE
AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE
FROM THE 'CODE OF
CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE
SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES.
DETAILS OF THIS
SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN
EU-REGISTERED
ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER
ON THE FITCH
WEBSITE.